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Unrelated business income tax (UBIT) is a federal tax imposed at the normal corporate tax rates on the net profits generated from trades or businesses conducted by tax-exempt organizations, including colleges and universities, that are unrelated to the exempt purposes of the organization.

Generally speaking, “outside sales”, sales of goods and services to non-University members, fall into the unrelated category. University members include UT departments, students, faculty, staff, and patients. Note: UT Alumni are not considered University members for the purposes of UBI.

The related/unrelated standard applies to how the money is earned, not how it is spent!

In an effort to increase voluntary compliance, the IRS, in the fall of 2008, sent some 400 colleges and universities, including UT, Form 14018, Compliance Questionnaire – Colleges and Universities.

The due date on the form was extended to February 6, 2009 (original due date was January 2, 2009).

The form focused on 3 areas: UBI, executive compensation, and endowments.

Lois Lerner, Director of Exempt Organization Division of the IRS, stated at the NACUBO Tax Forum in November of 2008 that the IRS will conduct ‘focused exams’ as a result of the compliance questionnaires, reviewing only the questions concerning UBIT and executive compensation. Exams should begin by late fall of 2009.

As it relates to UBIT, the questionnaire listed 44 potential UBI activities and asked each school:

Whether it participates in the activity

Whether it treats the activity as UBI; must select explanation code for a ‘no UBI’ or ‘part UBI’ answer

Of those activities participated in, was there a loss 3 out of the last 5 years? Yes answer may be indicative of lack of profit motive and any loss deduction potentially subject to IRS challenge upon audit.

-To be completed by each department that has revenue generating activities. The form is your support/defense on the position you take regarding whether or not the activity is related. The form will also assist us to gauge compliance in sales tax, foreign activities and nexus areas.

CBO Transmittal Letter

-To verify that the CBOs are aware of and agree with the tax positions taken by their units/departments.

A completed questionnaire should be submitted to the Controller’s Office on all income generating activities (except research) for FY2010. Thereafter, a questionnaire should only be completed if the activity changes or a new activity is started.